June 24, 2013

Market Poised For Rash of New RMB-denominated ETFs, Says BNY Mellon

  • Sharp rise in popularity of ETFs in Asia-Pacific presents growth opportunities for asset managers willing to innovate
  • Expect asset managers to respond to the opening of China's securities market, which will boost Hong Kong's ETF industry
  • Regionally-focused and sector-based exchange traded funds most likely to come first
  • Pace of product development favours physical ETFs rather than synthetics

HONG KONG, 24 June 2013 — As exchange traded funds (ETFs) steadily increase in popularity across Asia-Pacific and buck the worldwide trend to see a rise in trading in 2012, the region is ripe with potential for firms willing to innovate. Rex Wong, Managing Director within BNY Mellon's Asia Asset Servicing business, discusses the outlook for ETFs and why he expects to see accelerated development of exchange traded funds in Hong Kong, giving investors more targeted exposure to industry sectors, asset classes and investment strategies.

"The primary structural factors underpinning the growth of ETFs in Hong Kong are coming into place quickly. Foremost among them is the opening of China's Renminbi (RMB) Qualified Foreign Institutional Investor (RQFII) to non-Chinese asset managers. The creation of RMB-denominated ETFs will accelerate as regulators allow global fund managers into the market, bringing their expertise in structuring specialty financial products.

"We expect developments on these fronts to spur the creation of a range of investment styles and options of China-focused ETFs in Hong Kong that will ultimately match the diversity of options that we see today in other ETF markets, catering to both institutional as well as retail interests.

"The most likely ETFs to emerge in the short-term are specialized equity funds, such as those comprising equities of a particular industry sector or geographic region, and fixed income ETFs. In the medium term, there is scope for a range of more exotic or niche products, such as real estate sector and commodity ETFs built around precious metals.

"The most important factor to promote more RMB-denominated ETFs is a more inclusive RQFII program. Recipients of RQFII licences have been the primary sponsors of exchange traded products that invest directly in China's capital markets.

"The number RQFII licenses highly likely to be set to rise after the recent decision by the China Securities Regulatory Commission to extend RQFII eligibility to non-Chinese asset managers, including Hong Kong-based subsidiaries of global fund houses. Based on conversations we've had, we expect the fund management industry to respond to the opening of China's securities market and give a boost to Hong Kong's ETF industry. It's possible, for example, that a Hong Kong unit of an American or European fund house will get RQFII credentials by year's end.

"Another important factor driving ETF creation is the development of indices around which asset managers can structure new funds. With the recent launch of the CESC Cross Border Index Series by the China Exchanges Services Company, a joint venture between the stock exchanges in Shanghai, Shenzhen and Hong Kong financial institutions will be able to construct RMB-denominated ETFs to give investors exposure to a regional basket of equities.

"Another likely innovation is sector-based ETFs that invest in a basket of Chinese equities from a specific industry sector, such as technology or industrial companies. These would offer investors concentrated exposure to industries they believe are poised to outpace broader market growth.

Developing Hong Kong's ETF Infrastructure
"The growing sophistication of the ETF market in Hong Kong will put new demands on custody and asset servicing companies. The complexity of ETF structures and securities in which they invest will require more advanced systems for creating and tracking the value of ‘ETF baskets,' calculating changes to the baskets based on market movements and managing the flow of securities between custodians and asset holders to make sure that the representation of each security in the basket corresponds to its weight in the index. Hong Kong's administrators, custodians and asset servicing firms will have to grow in sophistication in order to keep pace with the demands of this new market."

ETFs Beyond 2013
"While the near-term trends are encouraging for the future of RMB ETFs, the range of ETF's tracking China's securities markets will not reach full potential until regulators further loosen restrictions on the amount of RMB that foreign asset managers can raise and invest in the A-share market.

"Continued liberalization of RQFII program will allow greater investment into China from global financial institutions that are growing more comfortable using ETFs. This includes public and private pension plans, insurance companies, global asset managers and securities firms.

"The current level of foreign investment in China's securities market remains extremely low by global standards. Foreign investors collectively hold approximately 1.5% of Chinese securities, compared to over 20% on average for other foreign markets. Given investors' interest in China and the continued growth of its economy, this disparity should correct over time."

BNY Mellon is one of the industry's leading exchange traded funds (ETFs) and exchange traded products (ETPs) administrators having administered this asset class since its creation back in the early 1990s. The company offers a comprehensive range of ETF and ETP services to meet the operational needs of investment managers, efficiently, accurately and with the speed that the market demands. BNY Mellon is the largest global administrator of ETFs in terms of funds serviced providing services to 580 separate portfolios worldwide totaling US$266 billion in ETF assets under administration (data according to Mutual Fund Service Guide, 2013, published in June 2013).

BNY Mellon's Asset Servicing business supports institutional investors in today's fast-evolving markets, safeguarding assets and enhancing the management and administration of client investments through services that process, monitor and measure data from around the world. We leverage our global footprint and local expertise to deliver insight and solutions across every stage of the investment lifecycle.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of March 31, 2013, BNY Mellon had $26.3 trillion in assets under custody and/or administration, and $1.4 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Learn more at bnymellon.com, or follow us on Twitter @BNYMellon.